Risk FX Awaits US GDP

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Market Drivers October 26, 2012
Weak results from AAPL and AMZN weigh on risk, but trading stabilizes
Japan CPI remains negative German consumer confidence best since 2007
Nikkei – 1.35% Europe -0.70%
Oil $85.27/bbl
Gold $1704/oz.

Europe and Asia:
JPY National CPI -0.1% vs. -0.2%
NZD Trade Balance -791M vs. -838M
CHF KOF Swiss Leading Indicator 1.67 vs. 1.66
EUR German GfK Consumer Confidence Survey 6.3 vs. 5.9

North America:
USD GDP 8:30
USD Personal Consumption 8:30
USD U Mich Confidence 9:55

A quiet trendless night in FX markets on the last day of the week, with risk aversion dominating early flows after Apple and Amazon earnings disappointed US investors post US close. The EUR/USD spent most of the night under the 1.2950 level but so far has not tested 1.2900 support as European equities stabilized providing some cushion for the pair.

The economic calendar was essentially barren with only the GFK German confidence report out earlier. Surprisingly enough the confidence reading jumped to 6.3 from 5.9 eyed – its highest value since 2007. The income expectations index broke a three-month string of declines to climb to 29.9 in October from 23.9 in September.

German consumers are clearly feeling better about their earnings prospects as joblessness rate inremains close to its lowest level since Germany reunified in 1990. Analysts hope that improving consumer sentiment could translate into better spending this upcoming Christmas season and help offset the declines in export growth keeping Germany’s GDP in expansionary territory and perhaps even stimulate the broader EZ economy.

In Japan the CPI data continued to point to deflation indicating that the country’s monetary policy is failing to to achieve its goals. Japan’s CPI printed at -0.1% a bit better than the -0.2% expected but still negative for the third month in a row. Economics MInister Seiji Maehara called on joint government action to combat deflation.

After a cabinet meeting, Mr. Maehera stated that,””Central banks around the world are easing monetary policy. The BOJ itself set a 1 percent inflation goal in February but that hasn’t been achieved. As price falls are continuing, I want to ask the central bank to pursue powerful monetary easing.”

Policymakers attitude towards deflation have now shifted from concern to a near state of panic as Japan’s economic growth slowed markedly in the second half of the year, due to dispute with China and stubbornly strong yen. The country’s Trade Balance figures recorded their worst deficit ever in the first half of the fiscal year and Japan’s economy after outpefroming G-3 in the first half of the year is now lagging behind.

In North America the focus will turn to US GDP data which is expected to improve to 1.8% from 1.2% the period prior as better retail sales and inventory build is anticipated to to have increased growth. If the number prints at 2.0% or better it should provide a boost to risk flows as the day proceeds as it will confirm the thesis that US economy continues to improve albeit slowly. If on the other hand the number misses it could trigger another strong wave of risk aversion with investors fearing that the slowdown in activity ahead of the US fiscal cliff problem could trip the economy back into recession.

Boris Schlossberg
Managing Director

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